Picks of the Day October 4, 2017

Is the Year 2000 in the Air?

Another day on Wall Street and another historic high! The market continues to climb slowly but very surely. There were two main themes that prevailed in the market in 2017 and both were felt yesterday as well: 1. The stable uptrend 2. A lack of volatility. Markets with strong and extreme momentum always bring about the same dilemma. Markets, now, have reached extreme technical levels, which makes buying more stock difficult, but on the flip side, there’s no way to know how much longer the strength will last.

Some investors grapple with the momentum by claiming time in and time out that the market has peaked. They persist in guessing over and over again when the market’s going to turn around. What happens?! They keep on getting caught napping. The stops on their shorts creep up on them – and yet they don’t throw in the towel! Eventually, one day the market’s going to fall and they’ll pop open the champagne, but all of the losses they’ve suffered until fate finally “smiles” on them, will be crippling.

Momentum players, on the other hand, don’t try to buck the trend but rather embrace the momentum. They try to go with the strength, rather than fight it – even when the positions they take are technically speaking, stretched. They hope that the stocks sold at extreme overbought levels will become all the more so. Indeed, at the end of the day, when the market takes a turn for the worse they’ll experience a temporary loss – but they’ll have a whole treasure chest of earlier profits, the losses only paling in comparison!

Losses are unavoidable when you stick to momentum to the extreme, but the gains accrued on days like yesterday and the day prior can be so impressive that any losses just aren’t even worth mentioning. That’s the reason that going with the momentum and sticking to the trend are so popular among professional market players.

I, personally, don’t like the historical comparisons that some analysts are making between our market and others, though the market’s present movement does bring to mind to some degree what happened between 1999-2000. The volatility then was much higher and the pricing of internet stocks was significantly more aggressive than that which we’re seeing today. The common thread between the two though is the belief that the market’s invulnerable. There’s irony to the humor among market players, but the word among traders is that the market will never halt. The voices claiming that the conditions are ripe for a bull market that will last for years to come have become more vocal than they have been in years. Even market commentators with tens of years of experience under their belt are writing that they’ve never seen anything like this!

It’s not tenable, and truth be told it’s not even advisable based on a projection like the one above to change one’s market strategy; all the same, it can help you recalibrate and adopt the right perspective. New investors – their gains mounting over the last few years – would typically attribute these gains to their financial acumen; what they don’t get is that with high tide, the sea lifts most ships. Our market is exceptionally strong and could easily go on. This period, though, is not exceptional in the sense that a large correction will eventually come, the cyclicity persisting.

Strong markets tend to stick to high levels. That’s still the key to successfully navigating this market. Don’t expect a strong market to crumble in one day’s time. When there’s so much momentum, the likes of which we have in this market, a directional change develops slowly.

At the 2000 high, the NASDAQ would move between 2%-4% – if not more, daily. In pure contrast, the S&P 500 has seen new highs, volatility though nowhere to be found. That’s the fundamental difference between our period today and the dot-com era. As long as volatility doesn’t pick up significantly, you can’t expect the market to change. The computerized algorithms and professional traders have become skilled at creating profits with this type of movement, relishing even the smallest move. Together, they have served to squelch volatility to lows never before seen because they’re buying even the smallest corrections.

Do you want to be able to identify the market peak?! Focus on volatility! Only when volatility rears its head, will the market change its character. As of now, with volatility highly checked, we can feel rather at ease that nothing different is going to burst forth in in the foreseeable future. Stick to the trend and keep on reeling in the bucks!

Wednesday: Traders today are waiting for the ADP survey on the number of new positions in the private job sector last month. It’s expected at 8:15 N.Y. time. Also on the roster, the service sector PMI will be coming out at 9:45, followed by the ISM Supply Managers’ service sector index at 10:00. Weekly crude reserves will be released at 10:30.

Earnings reports are expected from PepsiCo (PEP) and Monsanto (MON) before opening.

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